Colleges: What's the Market Failure?

Perhaps no more than half of those who began a four-year bachelor’s degree program in the fall of 2006 will get that degree within six years…

For college students who ranked among the bottom quarter of their high school classes, the numbers are even more stark: 80 percent will probably never get a bachelor’s degree or even a two-year associate’s degree.

Of the 30 jobs projected to grow at the fastest rate over the next decade in the United States, only seven typically require a bachelor’s degree…

And one thought provoking quote:

Professor Vedder likes to ask why 15 percent of mail carriers have bachelor’s degrees, according to a 1999 federal study. “Some of them could have bought a house for what they spent on their education,” he said.

There is much more in this article on increasing calls for alternatives to four-year colleges. This highlights the puzzle of why more alternative means of accreditation and training haven’t arisen. What’s the market failure? There are some obvious possibilities including informational problems.

But the large degree of government intervention, especially in the low-end of the college market, does suggest that part of the explanation may lie with policy and not market failure. After all, the large majority of revenues for poorly performing low-end schools like the University of Phoenix (NASDAQ:APOL) come from federal student loans.

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In addition, these schools are by far the top recipients of Pell grants, with the University of Phoenix receiving $656.9 million in the 2008-2009 school year alone.

With this level of intervention, policy has a large degree of responsibility for the state of the market. And that state does not appear healthy.